When Does Tokenization Make Sense (and when does it not)?

During the course of the last couple of years “tokenization” as a means to fund blockchain related startups has created as much traction as it has attracted criticism and doubt.

Both, the enthusiastic support, as well as the zealous condemnations are rooted in a fundamental misunderstanding. Most entrepreneurs, traders, and investors assume the application of a simple (and wrong) formula while analyzing projects and their tokens: Build an application or service, require the use of a token to unlock certain utilities within it, and token demand will correlate with the demand for the service it unlocks (and hopefully grow indefinitely).

Unfortunately, this is not how this works. For reasons that are probably too complex to discuss here, something can’t be simultaneously a return yielding asset, a means of payment, and a voucher granting access to a pre-specified service.

So how then should it work?

Originally, the term “tokenization” refers to a game-theoretical, or crypto-economical method of maintaining distributed networks. Specifically, networks in which all participants can be simultaneously producers and consumers of network resources. Ethereum is an excellent and classical example of such a system. On one side, you have nodes that validate transactions, mine blocks, and execute code, while on the other side, you have consumers that use these services to move money around and run smart contracts and dApps. Each participant in the network can assume any role or even both simultaneously.

Ether, the network’s token, has a crucial role to play here: its supply regulates the relationship between producers and consumers and assures that at any given moment the network produces enough resources to match demand. In contrast to many “App Coins” out there, one could not imagine something like Ethereum without a native token, not even in theory.

Value as a Cyber Security mechanism

As a mechanism regulating supply and demand of network resources, correctly designed tokens represent value, namely the value associated with the network they help to maintain. This value can then be used to incentivize useful behaviors (such as contributing computational resources), but maybe more interestingly - it can be employed to penalize harmful actions.

This is how Proof-of-Stake blockchains work. In a PoS environment, malevolent or damaging behavior is rendered punishable by requiring participants to submit a security deposit, or stake, in order to participate in the network. This results in two separate security layers. For one, operating a node is not a cost-free operation, and hence prevents Sybil-attacks in which one attacker controls numerous entities that flood the system. Secondly, the moment malicious behavior is detected, the security deposit can be confiscated, rendering attack attempts costly and economically unattractive.

The above refers mainly to maintaining blockchain consensus. However, this logic can be expanded to any arbitrary network function that relies on the cooperation of anonymous strangers on the Internet: Incentivize desirable outcomes, render destructive actions costly, and over the long run good will prevail. No cops or nannies needed.

So why does Qlear need its own token?

The Qlear ecosystem comprises several players and networks that need to be balanced in order to ensure system stability. Plasma nodes, MPC nodes, players, and game providers all have different incentives, interests, and attack vectors that need to be provided, protected, and blocked respectively.

First of all, a Plasma network can’t function properly without its own native token. We go into more detail here, but in short: to establish a Plasma network, a certain amount of Ether has to be deposited in the Smart Contract initiating the Plasma side chain. The deposited Ether is then re-represented in form of new tokens inside the plasma network and can be transacted at very low latency. This way the Plasma chain provides throughput capabilities of a small, directly connected network while maintaining the security standards of the entire Ethereum blockchain.

Secondly, Qlear utilizes a Proof-of-Stake analog to secure its Multi-Party-Computation network. We discussed this in depth here. MPC-staking allows Qlear to provide secrecy-preserving computation on the blockchain, without requiring specialized hardware or excessive network resources.

Last but not least, QLEAR tokens are the base mechanism through which players participate in deposit-requiring games, such as gambling, Poker, and the like. While on the front-end side gamers can deposit any kind of currency, within the Qlear network deposits are reflected in QLEAR tokens which are then managed by Qlear’s game contracts. This method also grants users full control and possession over their funds (rather than gaming platforms), while enabling a fast and easy transfer of tokens between games within the Qlear network.

This way, Qlear’s Tokenomics combine the best of two worlds: supply and demand are stabilized thanks to the staking requirements imposed on MPC nodes, while token velocity remains high due to QLEAR’s role as a gaming token mediator. This places QLEAR in the all-too-underpopulated goldilocks zone of healthy token ecosystems.